In early European trading on Wednesday, the U.S. dollar went up because Fed Chair Jerome Powell was expected to talk tough about inflation during his testimony to Congress. On the other hand, sterling went down because of more high inflation data.
At 3:05 a.m. ET (07:05 GMT), the Dollar Index, which compares the dollar to a basket of six other currencies, was up 0.4% to 104.650.
Wednesday’s main event is the start of U.S. Federal Reserve Chair Jerome Powell’s two-day testimony to Congress. Investors are looking for more information about whether another 75 basis point rate hike is likely at the Fed’s July meeting.
Analysts at ING said in a note that the next big thing for the dollar will be when Fed Chair Jerome Powell gives his semi-annual monetary policy testimony to the Senate. Based on the most recent FOMC meeting, Powell’s testimony should be pretty hawkish, which means that any dollar decline is likely to be limited.
At its next meeting in July, the Fed is likely to raise rates again by a large amount, and the president of the Richmond Fed, Thomas Barkin, said on Tuesday that Powell’s prediction that the U.S. central bank will likely raise rates by 50 or 75 basis points is “reasonable.”
The dollar also got a boost from the news that President Biden was considering a temporary tax holiday on gasoline. The U.S. government was going to use its financial flexibility to help consumers deal with the high cost of energy.
“A looser fiscal policy could give central bankers more room to ride out the inflation storm with higher interest rates,” said ING. “A mix of a loose fiscal policy and a tight monetary policy is usually good for a currency.”
EUR/USD fell 0.5 percent to 1.0473, and the risk-sensitive AUD/USD fell 1.1 percent to 0.6895. USD/JPY fell 0.2 percent to 136.31, after hitting 136.71 in early trade, which was its highest since October 1998. The yen was hurt by the growing difference between the yields on Japanese government bonds and U.S. Treasuries.
Minutes from the last Bank of Japan policy meeting were released early Wednesday. They showed that some board members were worried about the yen’s sharp declines, but they still stressed the need to keep the BOJ’s massive stimulus programme going to help a still-fragile economy.
Aside from that, GBP/USD fell 0.7% to 1.2191 after inflation in Britain hit a new 40-year high of 9.1% in May. This was caused by rising food and energy prices.
Last week, the Bank of England raised interest rates for the fifth time in a row. However, so far, this hasn’t done much to stop inflation from rising. In fact, the central bank said last week that inflation could reach as high as 11% in October.
There are more and more signs that the country is heading toward a recession. High rates of inflation and rising interest rates are both hurting growth.
